1-4 When economic profit is positive,a.total revenue exceeds total economic cost.b.the firm’s owners have successfully solved the principle-agent problem.c.the firm’s owners experience a decrease in their wealth. d. foreign companies experience loss of market share
Question
1-4 When economic profit is positive,a.total revenue exceeds total economic cost.b.the firm’s owners have successfully solved the principle-agent problem.c.the firm’s owners experience a decrease in their wealth. d. foreign companies experience loss of market share
Solution
The question seems to be asking for the correct statement when economic profit is positive. Here are the explanations for each option:
a. Total revenue exceeds total economic cost - This is correct. Economic profit is calculated as total revenue minus total economic cost (which includes both explicit and implicit costs). Therefore, if economic profit is positive, it means that total revenue is greater than total economic cost.
b. The firm’s owners have successfully solved the principle-agent problem - This is not necessarily correct. The principle-agent problem refers to the difficulties in motivating one party (the agent), to act in the best interests of another party (the principle). Positive economic profit does not necessarily mean that this problem has been solved.
c. The firm’s owners experience a decrease in their wealth - This is incorrect. If a firm is making a positive economic profit, it means that it is earning more than the opportunity cost of the resources used. Therefore, the firm's owners would be increasing, not decreasing, their wealth.
d. Foreign companies experience loss of market share - This is not necessarily correct. A positive economic profit for one firm does not automatically mean a loss of market share for foreign companies. Market share is influenced by many factors, not just the economic profit of one firm.
So, the correct answer to the question is a. Total revenue exceeds total economic cost when economic profit is positive.
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